Canada's dollar found its footing on Thursday, edging up 0.1% as the interest-rate advantage that had been drawing investors toward the US dollar narrowed. The loonie traded around 1.4245 per US dollar (about 70.20 US cents), recovering slightly from an 18-month low hit earlier in the week.
The move was driven by what Erik Bregar of precious-metals dealer Silver Gold Bull called "compression in the 2-year yield spread" — the difference between what investors earn holding US two-year government bonds versus Canada's. That gap had been unusually wide, making US-dollar assets more attractive. On Thursday, Canada's two-year yield sat roughly 152 basis points below the US equivalent, a slightly smaller gap than earlier in the week.
Higher yields generally make a currency more appealing because they offer a better return on cash. When the gap narrows, that advantage fades, and the loonie can stabilize.
Oil lends a hand
Oil also provided support. Crude prices climbed to about $91 a barrel, and as a major exporter, Canada often benefits when energy prices rise. Higher oil revenue can boost the economy and, in turn, support the currency. The TSX has also been helped by the oil rally, though bond yields have kept some pressure on stocks.
The oil surge is part of a broader trend that has been pushing Treasury yields higher, which has ripple effects across global markets. For Canada, the interplay between oil and yields is a key driver of the currency's daily moves.
Friday's jobs report is the next test
Investors are now focused on Friday's September employment report. Forecasts call for about 9,200 jobs added, with the unemployment rate ticking up to 6.5% from 6.4% in August. That data can quickly shift expectations for where the Bank of Canada takes interest rates, and in turn move short-term yields and the currency.
A stronger-than-expected jobs number could suggest the economy is holding up, potentially reducing the case for rate cuts. A weak print could raise expectations for easier policy, which would likely push Canadian yields lower and weigh on the loonie. Either way, the report is a catalyst that could break the currency out of its recent range.
What it means for your money
Currencies tend to react most to short-term rates because they set the everyday payoff from holding one currency versus another. When US two-year yields sit far above Canada's, cash in US dollars usually earns more interest, which can keep demand tilted toward the greenback. When that gap narrows, that advantage fades and the loonie can stabilize.
That's why Friday's employment numbers matter beyond markets. A stronger or weaker print can change how investors price the Bank of Canada's next moves, shifting Canada's two-year yield quickly. And because many travel costs, online purchases, and some imported goods are priced in US dollars, even small moves in the exchange rate can show up fast in what Canadians pay.
For everyday investors, the takeaway is that currency swings are not just abstract market moves. They affect the cost of a vacation in the US, the price of imported electronics, and the value of any US-dollar investments you hold. Keeping an eye on the yield gap and jobs data can give you a sense of where the loonie might head next.
Beyond the currency, the broader backdrop includes rising Treasury yields and wider credit spreads, which are making borrowing more expensive for companies. That can weigh on risk assets, including Canadian stocks, even as oil provides a partial offset.
In the near term, the loonie's fate likely hinges on the jobs report and the path of oil. If the yield gap continues to narrow, the currency could find more support. If it widens again, the recent low could be tested.
